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Where Can Deepwater Go From Here?

By Motley Fool Staff - Apr 14, 2017 at 2:17PM

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Excitement for deepwater projects has fallen a long way since 2007, but the projects aren’t all over and done with just yet.

Deepwater projects were the buzz of the day in 2007, and many energy companies across the board invested in them -- and with every passing day, many of those companies are abandoning those projects outright.

In this Industry Focus: Energy segment, two Motley Fool analysts explain why so many of these deepwater projects failed. Then, they look into five companies that are still involved with deepwater projects that investors might want to take a look at if they're interested in contrarian bets against the current market reaction toward deepwater drilling.

A full transcript follows the video.

This video was recorded on April 6, 2017.

Sean O'Reilly: Before we head out, I want to wrap about deepwater offshore drilling. 

Taylor Muckerman: Or lack thereof? [laughs] 

O'Reilly: Or lack thereof. When it was all peak oil right before the financial crisis in 2007, if memory serves, this was going to be the savior. It was going to be, we'll find these huge fields, we'll keep producing, we'll be OK for a while because of these deepwater offshore projects.

Muckerman: Yeah, their long-tail projects. Very expensive, though.

O'Reilly: Then, I don't know, Iraq's production gets back up to 4 or 5 million barrels; shale comes into the picture.

Muckerman: And the bottom falls out.

O'Reilly: Is it game over? What's going on here?

Muckerman: It is for some companies. You've been seeing a lot of restructuring lately. Hercules Offshore --

O'Reilly: I remember them.

Muckerman: Yeah, they were predominantly shallow-water, jackup rigs.

O'Reilly: So this is like 100 miles off the coast of the Gulf?

Muckerman: I don't even know if it's that far. It's all jackup rigs. They're not floating, they're actually on the surface below the water. They can't go too deep. But then again, it wasn't as expensive as deepwater, so you would expect, maybe there's some leeway there. Unfortunately not. Hercules Offshore restructured in court. Shareholders obviously not doing so well.

O'Reilly: Did they just have too much debt?

Muckerman: I can't speak to Hercules, but the latest one, Seadrill Deepwater, all debt. I remember talking about this company back in the boom days in 2012 and 2013. Very wary then when oil was surging, and deepwater was the Mecca of oil for the next few decades, or so people thought. They were completely funding their dividend out of debt. They were free cash flow negative before dividend, so then you have to take on debt to pay the dividends, because they had one of the highest yields in the business. Obviously unsustainable now. We talked about it, myself and Joel South talked about it extensively back then.

O'Reilly: Oh, so I should go to YouTube and find these four-year-old videos. [laughs] 

Muckerman: Yeah, YouTube "Taylor Muckerman Seadrill," there's proof in the pudding right there. But now, Transocean has been selling rigs to the tune of billions of dollars lately as well.

O'Reilly: Their fleet age is dropping a lot, by the way. Have you seen that?

Muckerman: It is. For a while there, they had one of the oldest fleet ages. Seadrill and Ensco had some of the youngest, along with Noble. But now they're selling off their old rigs, some of their shallow water rigs.

O'Reilly: And retiring.

Muckerman: Yeah. Retiring, not even selling them all off. They did make a pretty big deal, I think, in the last couple weeks. But, a lot of restructuring going on. And as we all know, when a company restructures when bankruptcy is involved --

O'Reilly: Shareholders are last in line.

Muckerman: Equity shareholders are usually the tail end of the bread line. This bodes well if deepwater does come back in favor, you have less competition and you've weeded out the weaker players who've tried their darnedest to get in when the getting was good. They weren't secure in their balance sheet, they had too many rigs on order. You're going to see, the players who are going to survive are going to, if deepwater does come back, they're just going to have a field day. And that's companies like, Transocean, I don't think is going to go anywhere any time soon. Ensco, Noble, and if you're looking at the companies that supply them with equipment, National Oilwell Varco (NOV 3.38%) and ... what was the company they spun out?

O'Reilly: DistributionNOW. That's the parts, mostly.

Muckerman: Yeah, they've done a great job of standardizing a lot of the parts on these rigs. If you want some contrarian bets on the energy sector, I'm not saying go buy them now. I'm saying take a look at Ensco, Noble, Transocean, NOV and DNOW. If you want five contrarian bets, maybe take a look. And even Petrobras, integrated oil company out in Brazil. Brazil, in the pre-salt formation has supposedly some of the most prolific oil reserves under the deepwater there, and Petrobras has first come first serve.

O'Reilly: Actually, over a year and a half ago now, Tyler Crowe and I talked to National Oilwell Varco CEO.

Muckerman: Yeah, it's great people down there.

O'Reilly: I had sat down and interviewed [Robert] Workman, the CEO of DNOW. To any of our listeners, if you want to see those interviews, if you're wondering what those guys were thinking back then, feel free to email us and I'd be more than happy to send those to you.

Muckerman: I interviewed --

O'Reilly: You talked to them a year before us. They're cool guys.

Muckerman: -- Pete Miller on camera a year before. Yeah, we went down there two years in a row to talk to them and a few other companies. That's a very well-run company. It just got hit by market forces.

O'Reilly: And that's how economics work.

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